WITHHOLDING COMPLIANCE PROGRAM
RESULTS ARE TRENDING FAVORABLY, BUT PROGRAM ENHANCEMENTS ARE NEEDED

Issued on March 23, 2010

Highlights

Highlights of
Report Number: 2010-40-030 to the Internal
Revenue Service Commissioner for theWage and Investment Division.

IMPACT ON TAXPAYERS

The
Withholding Compliance Program (Program) is based on the premise that by
addressing underwithholding at its source, noncompliance problems can be
resolved early in the process and, thereby, prevent future delinquencies that
can be costly to both the Internal Revenue Service (IRS) and taxpayers. While the Program is helping ensure
individuals are meeting their obligations to pay taxes, steps are needed to
ensure opportunities are not being missed to address underwithholding problems
among high wage earners and Program actions are not unnecessarily burdening
taxpayers and employers.

WHY TIGTA DID THE AUDIT

This
audit was initiated to evaluate the effectiveness of case selection and
processing in the Withholding Compliance Program.The audit was conducted as part of our Fiscal
Year 2009 Annual Audit Plan and addresses the major management challenge of Tax
Compliance Initiatives.

WHAT
TIGTA FOUND

Compliance and
collection data are trending favorably under the Withholding Compliance Program.However, there are two steps that could be
taken to enhance its operational effectiveness. First, a statistically valid
risk-based approach needs to be explored to select problem withholding cases.

While the
current approach has successfully identified a number of problem withholding
cases, it does have some limitations.The most significant limitation, perhaps, is that certain risk factors
are not progressive since the withholding rate remains constant as the amount
of wages increase.Consequently,
opportunities may be missed to detect and address withholding problems among
higher wage earners. Moreover, some in
the taxpaying public might perceive that anapproach
using a constant withholding factor is not as impartial as it could be because
individuals at higher wage levels can have withholding problems and avoid being
selected for possible Program action.

The second
step that could be taken to enhance the Program is ensuring lock-in letter
issuance is not unnecessarily burdening employers and taxpayers. Lock-in
letters direct employers to withhold taxes for a specific employee at a
specified rate.

WHAT TIGTA RECOMMENDED

TIGTA
recommended that the Director, Compliance, Wage and Investment Division,
develop and implement a statistically valid study to assess the
underwithholding compliance risk throughout all segments of the taxpayer
population and use the results to adjust, as appropriate, the case selection
methods.TIGTA also recommended that the
Director ensure actions are taken to correct computer programs that initiate
lock-in letters and research the employers TIGTA identified that may have been
incorrectly issued lock-in letters to determine if they are overwithholding any
employees and, if necessary, correct the withholding.

IRS management agreed, in
general, with our recommendations and has or plans to take actions in response
to our recommendations.The IRS plans to
perform a statistically valid study to formulate a risk-based decision for case
creation and, if necessary, use the results to adjust the case selection
methods.In addition, the IRS plans to
continue pursuing programming changes to correct computer programs that
initiate lock-in letters.The IRS also plans
to research employers identified in our audit to determine if corrections are
needed.However, this research will not
be expanded as it would be cost prohibitive from a resource allocation
standpoint.

Management
also concurred that their corrective
actions in response to our recommendations, along with other planned Program
improvements, will result in significant revenue from additional withholding. However, the full realization of the projected
revenue is dependent upon resources and may be negatively impacted by the
recent economic downturn.

READ THE
FULL REPORT

To view the report,
including the scope, methodology, and full IRS response, go to: